2004): The Effects of Compensation Schemes on Self-Selection and Work Productivity: An Experimental Investigation, mimeo

This research examines experimentally the impact of productivity-based versus lump-sum compensation schemes on self-selection and work performance. We find that as predicted by Jensen (2003), participants in a laboratory experiment with salient incentives self-select themselves into preferred compensation schemes based at least partially on performance. However, the compensation scheme selected is also based on individual attitudes toward risk. Individuals demonstrating a higher degree of risk-aversion in a lottery-selection task exhibit a higher probability of selecting the risk-free lump-sum compensation scheme, while less risk-averse individuals are more likely to select the productivity-based scheme. A laboratory firm offering linear compensation achieved significantly higher productivity than an identical firm offering flat compensation for two reasons: first, more highly skilled workers selected it, and second, workers on average, regardless of their self-selections, were more productive under the linear scheme. *We would like to thank the Economics Department at the Queensland University o